Pieces falling into place

We got the bounce I expected. I mentioned yesterday that I wanted to see signs that the dumb money traders i.e. rydex and option traders, are showing pessimism before declaring the "all clear" signal for the market to charge to new highs. Well, after yesterday's rally we're one big step closer to that point.

Typically, traders/investors become more bullish when the market rises and more bearish when the market drops but since this rally that began in March, I have often seen the opposite, especially when the market rises, i.e. people becoming more bearish as the market rises. I'm a contrarian at heart and one of the most effective contrarian signs is when you see traders/investors fading the current trend. Remember, it's only natural for people to be bullish in a bull market and bearish in a bear market and so you shouldn't be too haste when making the contrarian case against such observations, but when you see behavior that is showing signficant resistance to the current trend that's when being contrarian to such notions is much more effective. Do you follow me?

When the market started dipping in late September, rydex traders where buying the dip and as I noted, this was a sign of complacency. Now, after getting burned, they used yesterday's rally to dump their bullish positions en masse. And so as of now, the ammount that these traders have in bull funds and money market funds are equivalent to the levels seen in early September when the market was at a ST low.

Now, before you hock the house and go long, we still are not seeing tech leading and yesterday's action was a bit suspicious in that we basically went straight up right out of the gates without going in the red at least once with tech lagging...that's not really great market action. The chart is now setting up for a potential lower high, lower low pattern which I think will end up being yet another bear trap.

Last night Austraia raised rates by .25%. I believe this is now the second central bank to do so (Isreal being the first). This is a bullish sign longer term. Do you remember how markets fared in the months that followed after the first interest rate cut a couple years ago?

Bottom line: The pieces are falling into place for the bulls to take back control of the market but I'd like to see better market action (i.e. tech leading and morning weakness followed by afternoon strength). Be on guard for a potential lower high, lower low headfake or a retest of 1020 on the SPX. I'd be very, very careful if you try to bet on this senario though.